Using different sources of alpha to maximise index-linked gilt returns

Mike Riddell, Senior Portfolio Manager, Allianz Index-Linked Gilt Fund discusses the reasons behind the new launch of the Fund, the differences between this fund to its peers and explains how it can be used in client portfolios.

MIKE RIDELL
The Allianz Index-linked Gilt Fund is a new fund from Allianz. We’re trying to beat the benchmark, which is the FTSE Index-linked Gilt All Stocks Index. We’re trying to do that by around 15 basis points a year, and we’ll do that hopefully in a number of ways. Different sources of alpha, so duration management, we’ll be taking a duration position of plus or minus three years versus the benchmark, so that’s a lot of flexibility. We’ll be taking yield curve positions, relative value positions across the index-linked gilt curve, and also we’ll be going across market. So we could have US tips for example, or French government bonds, Italian government bonds, hedged back though always into sterling.

There are some changes, some very interesting changes to the WMA sectors in 2017. So from index-linked gilts not being part of people’s benchmarks, our own clients’ benchmarks, you now have a situation where 5% of some portfolios are benchmarked against index-linked gilts 2½% of say the balance or the income mandates. And we’d spotted that there are not very many active index-linked gilt funds out there. And this is an opportunity for us to enter a market which we think is underrepresented. And we’ve also had a lot of client feedback previously where people want to have active indexing gilt funds, and they’ve come to us to launch these products for them.

We have a global top-down process, so exactly the same really that we already use for the Allianz Gilt Yield Fund, and we’ve done that successfully over the last few years. It’s part of a top-down process, macro top-down process, where I draw on the input from a number of my colleagues around the business. So I have actually, specifically for inflation I have a number of colleagues based on Continental Europe who run multibillion euro mandates looking specifically at inflation strategies. I have for the last few years been feeding in my UK inflation views to their process, so essentially this is just a carve-out of a process and a team that already exists.

We have to abide by the IA index-linked gilt sector rules, so for example we must always have 80% in index-linked gilts. We have a reasonable amount of flexibility, so possibly more flexibility than some competitors, but the real difference is fees. We are coming at this as a new product as a position of strength. We don’t have a backbook that we have to defend. But I think the biggest difference with our fund and existing funds is fees. So the fees that we’re charging to run this mandate are just 30 basis points. And that is very close to the fees that a number of passive funds charge, where there are some passive funds charging 25 basis points for example. In other words, we only have to outperform by five basis points a year to do better than the passives, but it’s particularly attractive versus existing active funds within the sector.

Index-linked gilts in many ways are a peculiar asset class, and in managing index-linked gilts for many years now I do believe it’s one of the biggest sources of inefficiencies in the market. And you can generate, and we have generated a lot of returns by timing around things like syndications or auctions, where you get consistent anomalies, which we can take advantage of in an index-linked gilt fund. In terms of index-linked gilts as an asset class, clearly if at the end an investor is benchmarked partly against index-linked gilts, then they should be part of your portfolio, whether you’re underweight or overweight that is of course your decision. We also believe there is good evidence that index-linked gilts also offer us a diversifier within a broader portfolio or as an alternative to gilts if an investor is invested in conventional gilts.